by Calculated Risk on 9/20/2009 04:11:00 PM

From a NY Times Editorial: Facts and the Financial Crisis

The Financial Crisis Inquiry Commission, created by Congress to examine the causes of the crisis, held its first public meeting last week. ... the meeting was a long time coming, and thin on substance.

The NY Times asks some good questions:

In the run-up to the crisis, what did regulators, particularly the Federal Reserve, know and do in response to unconstrained lending? What were their thoughts about the way banks and investors worldwide increasingly disregarded risk?

Publicly, they did not act to curb the excesses. But internally, was there contrary analysis or dissent? Were there chances to take another course that we may learn from now in hindsight?

Answers to these questions are in files that are not public and in the heads of the people in positions of responsibility at the time. The commission must be aggressive in its pursuit of documents and unflinching in taking testimony at even the highest levels of government and business.

It will be interesting to read the 2004 FOMC transcripts to see if there was any discussion of lending standards, house prices and a credit bubble. It makes no sense that we have to wait 5+ years for the transcripts ...

I suspect we will find some concerns expressed in 2004 - perhaps something similar to what Fed Economist Michael Prell said at the Dec 21, 1999 FOMC (about the stock market):

To illustrate the speculative character of the market, let me cite an excerpt from a recent IPO prospectus: ... “We do not expect to generate sufficient revenues to achieve profitability and, therefore, we expect to continue to incur net losses for at least the foreseeable future. If we do achieve profitability, we may not be able to sustain it.” Based on these prospects, the VA Linux IPO recorded a first-day price gain of about 700 percent and has a market cap of roughly $9 billion. Not bad for a company that some analysts say has no hold on any significant technology.

The warning language I’ve just read is at least an improvement in disclosure compared to the classic prospectus of the South Sea Bubble era, in which someone offered shares in “A company for carrying on an undertaking of great advantage, but nobody to know what it is.” But, I wonder whether the spirit of the times isn’t becoming similar to that of the earlier period. ... At this point, those same people are abandoning all efforts at fundamental analysis and talking about momentum as the only thing that matters.

If this speculation were occurring on a scale that wasn’t lifting the overall market, it might be of concern only for the distortions in resource allocation it might be causing. But it has in fact been giving rise to significant gains in household wealth and thereby contributing to the rapid growth of consumer demand--something reflected in the internal and external saving imbalances that are much discussed in some circles.
emphasis added

I wouldn't be surprised to see something similar in the 2004 transcripts, but about housing and the credit markets.